Banking

Banking
1Q13F: Strong top lines. We expect banks to report overall good 1Q13F earnings (+23% YoY,
+59% QoQ) supported by strong top lines - both net interest income and non-interest
income. (See Figure 1 for details for each bank.) Key takeaways from bank 1Q13F previews:
1. Loan growth: Continued strong at ~3% QoQ (1.8% 2M13), mainly driven by retail
loans (particularly auto loans for first-car buyers who ordered before end-2012 in
order to get the tax incentive before it expired), mixed with corporate, SME and
government loans.
2. Net interest margin: QoQ stable or slight improvement on the back of slipping loan
yield as a result of a higher proportion of low-yield loans (new car, housing, corporate
and government loans) but offset by easing cost of funds on QoQ less aggressive
deposit raising and re-pricing of deposits from a timing lag from the interest rate cuts
in 3Q12.
3. Non-interest income: Continued strong, driven by bancassurance, loan related fees,
and income related to capital market.
4. Cost to income: Seasonal fall QoQ, mainly on easing marketing expenses.
5. Asset quality: Provision expense is expected to decrease QoQ on seasonal factors for
most banks with the exception of KBANK (countercyclical buffer), TCAP (60 bps of total
loans, in line with full-year guidance), TISCO (over full-year guidance of 90-100 bps of
total loans to smooth out bottom line) and KK (rising NPLs for used car loans).
Raising general provisions – negative sentimentally but not fundamentally. Our
discussion with several banks revealed the BoT is pressuring banks to build up their general
provisions as a countercyclical buffer by factoring in the Probability of Default (PD) and Loss
Given Default (LGD), though the BoT has made no official announcement to this effect. We
were told that the additional general reserve suggested by the BoT is mainly based on
special-mention loans (overdue 1-3 months) and that the minimum required general reserve
for special-mention loans may be raised substantially from 2% to probably more than 10%,
depending upon each bank’s loan mix (i.e. higher general reserve against personal loans than
corporate loans) and historical data. One bank said that the deadline is 2Q13. This issue is still
unclear and has become a concern for the sector and an overhang after KBANK surprisingly
announced a hike in 2013 provision guidance effective 1Q13. In our view, this is a prudent
measure and not fundamentally negative – though investors may take it as such - because it
implies stronger profitability supporting more prudent provisioning. In fact, this is not a
totally new story, as the BoT has been encouraging banks to build more general provisions
since 4Q11 or 1Q12 when it gave an incentive for banks to boost general reserve by allowing a
reclassification of certain general reserves as specific reserves to qualify as tax deductible
expense. With the highest LLR coverage and excess LLR, BBL is expected to have the least
impact. Banks with low LLR such as LHBANK, TCAP and KTB are expected to be hit the
hardest. (See Figure 3.)
Top picks – BBL and KTB. KTB and BBL remain our top picks as investment cycle plays.